Is it possible to collect debts gentlemanly?


Source: Ekonomichna Pravda.

Why do we need the trust property as a way to secure performance of obligations

If people didn’t trust each other, they would have to live within their means.

Herbert V. Prochnow

One of the fundamental elements of the market economy and the legal system is the ancient Roman principle Pacta sunt servanda (agreements should be performed).

However, in Ukrainian realities, a lack of business culture, the specific experience of primary capital accumulation and a range of devaluations helped the national business community to develop its own maxima: “Only the cowards repay”.

As a result, we obtained overload and inefficient state enforcement services along with the wide use of unofficial means to collect debts, which are close to break the law or even step beyond its bounds.

At the same time, the laws regulating the most common way to secure the performance of obligations – a pledge – proved to be too inefficient.

If you wish to have a general idea of how pledge holders get nothing, read the draft law #2286a rejected by the Verkhovna Rada of Ukraine as an unsuccessful attempt to “fill” some of gaps in the law on pledge.

Are there any options to solve the problem of non-performance of obligations? It seems like that.

The full implementation of a system of private enforcement agencies as an alternative and a competitor of the slow-moving state executive service, the reform of bankruptcy legislation and the improvement of the law on real estate mortgage, probably, can help.

But even the reforms described above may not be enough. Therefore, another way to address this problem may well be the introduction of trust property as a way to secure the performance of obligations, which is an alternative to the pledge. This is a mechanism known in the West as fiduciary transfer of title. According to it, a debtor transfers some of his property to the creditor’s ownership by analogy with the case of transferring the property to a creditor as a pledge to secure the performance of obligations.

The creditor can sell the transferred property only if the debtor fails to perform his obligations, and the extra amount of proceeds should be returned to the debtor.

At first glance, the described mechanism seems to be too similar with a pledge. The only exception is that the creditor has the ownership right for this property.

This difference is a main advantage of the trust property concept over the pledge – as a rule, creditors will not need to apply to the court or to the executive service in order to enforce the property transferred to the trust ownership. He can do it independently on his own behalf.

In this case, the debtor will be deprived of the possibility to apply most of the existing mechanisms that would block the enforcement, because he will not have the ownership right for such property.

However, this security mechanism also has its weak points. The main of them is the creditor’s ownership right. After all, it will be difficult for the debtor to agree to give away his property psychologically.

Moreover, the creditor’s financial position or his reputation may be not very attractive. In addition, the balance of interests is clearly unequal in these relations – the creditor has significant advantages and a potential opportunity to abuse his rights.

That is why the trustee’s status should be regulated very carefully, and the use of trust property in practice will naturally be limited to cases, when the debtor has no other opportunity to obtain a loan.

Probably, most lawyers reading this text understood right from the start: trust property as a way of security is a result of the Anglo-Saxon system of law. Therefore, many of them doubted the possibility of its implementation in the Ukrainian legislation.

You can agree with such doubts, but the fact that EU countries with the continental legal system integrated the transfer of title into their legislation with no hassles offers some room for optimism.

Moreover, according to the Directive 2002/47/EU, every EU Member State should implement the possibility of transferring the property into trust ownership as a way of security. What is more interesting, Ukraine committed to implement the Directive mentioned above under the provisions of the Association Agreement with the European Union.

That is why the introduction of trust property has become one of the important parts of the comprehensive draft law #6540 developed by government and BRDO experts and aimed to significantly improve the investment climate of our country.

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Will it be easy to implement the trust property concept in Ukraine? What can said for certain is that it won’t. The introduction of a new method of securing an obligation will require to amend the tax legislation, accounting and bank reservation standards.

In addition, we will have to develop a judicial practice from a scratch. Is it worth these efforts? It seems like that. But the cornerstone of this should be the effective and careful work of the parliament – since too interesting and serious tool is planned to be introduced.